When Hope Fails: Why Italian Banks Better Be Praying Draghi Can Still Do "Whatever It Takes"

When back in July 2012 Mario Draghi, on the verge of yet another Eurozone collapse, promised the world that he would do literally "whatever it takes" to defend the Euro, banks in the insolvent continent took his promise seriously, and ramped up their participation in the most epic Ponzi scheme conceived in Europe to a whole new level. The scheme, of course, was one where banks would buy sovereign bonds issued by their host country (most notably Spain and Italy), and subsequently repo them back to the ECB for near full cash (net of a minuscule haircut) collateral.

The problem for these same banks, is that while they engaged in the greatest ECB-backstopped leap of faith ever, and scrambled to buy every last piece of insolvent paper they could find, even as the host governments engaged in absolutely no structural reforms and raked up new record amounts of debt - while certainly wasting no time in blaming (f)austerity for every political failure due solely to their corruption and incompetence - the ECB had no real deus ex machina up its sleeve. What it did have is an imaginary "forward guidance" construct - a monetary "all in gamble" backed by what little faith in the ECB remained - dubbed the OMT (or the Outright Monetary Transactions) program, its only purpose was to boost confidence and to force the selling wave to end, replacing it with mindless buying.

It succeeded for a while.

The biggest drawback of the OMT, however, is that it was never actually meant to be put into operation, and a year and a half after its inception, there is still no legal term sheet, or conditionality framework, in which it would be enacted into practice. The reason is simple: the OMT was never supposed to be actually enacted as an outright, unsterilized monetization mechanism, and certainly not before the Merkel re-election. Doing so who destroy any chance the Chancellor had of storming to the top, as it would become clear to Germany that the only possible fallback plan Europe has, is to jump head first in a strategy made quite clear by both the Fed and the BOJ, namely epic, unbridled unsterilized monetization of debt, bringing those so painful Weimar Republic flashbacks with it. Something Germans is all too familiar with.

In other words, beginning in July 2012, Europe's only strategy became hope. Hope that nothing bad would ever again happen. Hope that monetary policy can mask the absolute failure that fiscal policy across the continent (and world) had and has become. Hope that nobody ever calls the bluff of either the ECB, or the global central bank syndicate.

Over the weekend, Sylvio Berlusconi just called that bluff by telling his ministers to submit their resignations.

What happens next is unclear. What is clear is that as the chart below shows, Italian banks now own €400 billion, or a record amount of Italian sovereign paper, four times more than before the crisis. While this strategy worked miracles while everyone was behind Draghi, now that Italy has hit a dead end, and hope as a strategy has failed, the simple game theoretical question is: will he who sells first (again), sell best? The answer will depend on whether Italian banks can mangle accounting rules, and like the ECB pretend they have no Mark-To-Market concerns about bond prices.

If enough bonds were purchased and moved to "Held To Maturity" accounts, then perhaps a selling avalanche can be avoided. If not, then Mario Draghi's OMT is not only about to be tested, but once said test fails, the ECB president will be scrambling to come up with even bigger and more bombastic promises that all shall be well. Alas, since he already has gone "all in", one can see why things may be a little more different this time.

Finally, with hope no longer a strategy, perhaps none other than Italy's Prime Minister has shown what the only remaining "option" for Italy is. As Bloomberg reports, Letta, facing a collapsing government, spoke at a conference organized by a Christian charity group earlier today. During his speech, he got applause after asking audience to pray for Italy. He said "We will give it our all because we are hyperdetermined, but allow me to add that if you find yourself saying some prayer for Italy in these three days, it will certainly be useful to us."

And there you have it: when hope fails, there is still that one final fallback. Prayer.

Italian banks are stuffed to the rafters w/ Italian sovereign bonds, but the ECB won't let these banks collapse. It will value the bonds at whatever price will allow them to loan the banks enough money to remain in operation.

As Tyler himself has been saying in his difficult-to-read but important articles on shadow banking and the need for collateral

There is a great need for banks and other entities in the system to have 'good collateral' (i.e., government bonds) rather than cash ... and that is a major problem with QE because tho it spreads cash to the banksters, it 'silos' the collateral (the bonds bought) on the Central Bank balance sheet, where they are of little use to perpetually-needed shadow banking operations

In this bizarro banking world ... a bank with cash can lend it out or park it as reserves and thus basically lose the use of it ... tho there is also proprietary trading as well, gambling on mass financial destruction

But if a bank has a government bond ... well that can quickly be repo'd for cash, and the bank has both the cash AND the collateral, much better than cash, and greatly pumping up the bank's balance sheet in our Ponzi world

And since collateral in the system seems to be quite often re-hypothecated ... well, that's even better ... one million-euro or million-dollar gov't bond gets to turn into repo cash over and over again, ha !

Of course this will all end 'well' ... Ha ! ... Heck of a hyper-Ponzi game while it is being played

Just finished Ceasar's Column by the way. 123 years since publication and little has changed. Donnelly certainly called it socially and politically, though he was a bit off as to where we'd be technologically.

What people have completely discounted is that Merkel will have more flexability now. The issue will be the race to the feeding trough, for the PIIGS. Italy just doesnt want to get beat by Spain, they could give a crap about Greece and Portugal. The West German taxpayer is going to be bled blind, and yes, the USSR won.

Jesus! That is bad! Having the nations banks as holders of the nations debt, when we all know government has now guaranteed Banks balance sheets, like Ireland, Britain etc. Talk about a "catch 22". Some people call all this financial engineering between Bankers and Governments and Central Banks one giant circle jerk. It truely is just that. It is easy to imagine that when a financial crisis breaks out, it will spread so fast as to be an instant collapse across the entire nation. One minute all the debts are holding firm and are being serviced, then some incident either local or foreign triggers a crisis in one entity, this, because of the circle jerk nature of the financial engineering, will cause instant and absolute collapse. A vast adventure in money printing would be the only viable response, and it would need to be epic. That is what the IMF and it's special drawing rights scheme is sitting out there waiting for. When she blows up this time, two things will happen in Europe. One, the armed forces of NATO and the vast EU secret police organizations will impose a brutal dictatorship with bankers as the agent behind the armed forces and the IMF will be brought in at gun point to being a vast and never before seen exercise in money printing. While guns impose austerity at threat of death on all average Europeans, the IMF money printers will send plane loads of Euros to Banks, Investment Houses, Stock Markets and all bond holders. An elite 1% will again be made whole as public expense. The media and right wing think tanks will call it Free markets at work rewarding the producers and the inovative financiers. When in fact it will be an exercise in Communism for the elites, and brutal fascist dictatorship for the average people. The communism is a public guarantee of the elites incomes, the fascism will be gun point repression of average folks with all power on the local level passing to the biggest corporations using government thugs to impose their idea of free market onto the average people.

The USA itself is not immune from this same system, it has already been in stage one after the 2008 crisis, where a mild form of bailouts and fascism was practiced. Do not be fooled by the Republican versus Democat game, the media will pound that theme of good politicians versus bad politicians, depending on what form of political religion you practice. The game is to make you think a new republican president will bring back freedom, real market capitalism and personal freedoms. Or Liberals will believe just a more man of the people liberal can stop the wars and transfer wealth down to the middle and poor. Forget that shit! It is all a game. Under the liberal Obama, drone wars have killed thousands, the USA is an offical ally of Al-Qaeda, the transfer of wealth to the top 1% has exceeded that under Mr. Bush, corporations write the regulations of finance, pollution and worker safety. Government is taken over by the big money interests, which are corporations, who under the socialist Obama have reached record profits, andrecord power. The Republican plan is to increase the corporate powers over and above Obama's transfer of wealth and power. Republicans plan wars on Syria, Iran and Russia. Military spending is planned to be the only function left of government. So pick your poison! Both parties are just fronts and hoaxes for the powers behind the fake democracy of America. Obama is evil, he is a liar, he is a killer, he believes government has a right to ignore the constitution, he plans wars of conquest, he arms terrorists in the open, he and Saudi Arabia are allied in a massive Sunni Jihad across the Middle East.

The next President will be a Republican, that is for certain. What will he and his elite friends impose upon America and the world. I suggest you research the 8 year Bush administration. That will shed light on the basic governing plans, but expect the Bush agenda to be upped a few notches. Wealth Transfer, Corporate Control, open bribery of government and war mongering of unprecidented levels are to be expected. If by chance a Democrat gets the presidency again, very unlikley, expect the same thing, but with a touch of social liberalism, like gay rights, and women's right to abortions, etc. ect.

I ask you, examine the Bush record, examine the Obama record, not the fake media coverage, but what has really been imposed on America. You will not like what you find. America is a one party state, just as the USSR was a one party state. The Party may have minor social differences, but the main themes are the same.

The evil that now lurks in the Banking sector is now the focus of evil in the modern world. Their power has never been greater. Their control of media and armed forces, including police is vast. Occupy Wall-Street was crushed on orders from America's Banking board rooms, the federal government and local police coordinated the repression, and it was carried out with precise and crushing power. Something the USSR would have been proud to have accomplished!

Hi Jack Burton - the only exception I would take to your well-reasoned comments is that they presume that NATO soldiers ( and officers) would 'do their duty'. The Germans might, and the British - but the Dutch, the French, the Italians, the Spanish, the Greeks etc? I somehow doubt that there would be a uniform response to orders to keep the people in their homes and out of the streets.

Now if this were to happen in the US I am quite confident that 'our troops' would not hesitate to shoot down any and all terrorist agitators ( aka citizens) in the streets, including those in baby carriages ( might be a bomb in there ya know).

In good ole USA, a USA T-Bill and T-Bond is worth more to a USA Bank than cash, because these debt instruments are ASSUMED to be RISK-FREE. USA banks are REQUIRED to buy at treasury auctions. If USA creates ANY default risk and people's RISK-FREE assumption is questioned, all the mathematical equations that support all equity and credit markets become unstable. The USA Fed will have to buy all USA treasury debt that enters the market to maintain the validity of the RISK-FREE assumption.

The leverage that this RISK-FREE collateral supports makes the $17 trillion USA debt look like chump change. We can see the light at the end of the tunnel, but few recognize the light is on a super long freight chain running at the speed of light with such mass and speed nothing can stop it. If you know your physics, you can start to understand the end game.

When it comes to Evil, the only thing I have yet to understand is the "why" part. They're already filthy rich, and can live lives of liesure until the end of their days: women, travel, drink, drugs, mansions, fine linens, all the fancy things of the world.....but they want yet more.

And does it bother them, these elitists, that the common people do not bow before them in the street and grovel? Methinks perhaps that is the "why".

ah ha...i think you miss the one sure thing that is right about to happen...a world war.

used to be that ears were fought over resources...well that wil be true for the next one..but it wil be fought over someone else benefits..so the name of the world war will come to be known as the "benefit wars", fought by armies of welfare beneficiaries and will simply migrate from the current government debt funded "paper war" into a real guns and bullets war.

you heard it hear first, though i dont know i want this to go down as my five minutes of warhol (apt name though, hey?) fame.

If Sylvio Berlusconi can play the hand hes holding he will become the next Italian leader in the mold of Mussolini, and it will be a cold dish that will be served on his foes, Draghi and Merkel will get as well the rest. The revenge will be sweet and the pain will be intense Draghi better make sure his family and I mean All his family are out of Italy when this ship goes down.

Nothing will happen, the usual blablabla, SuperFranfurtMario (more than ever "super" , as Angela desperately needs him) will fix it. And, business in Italy will be the same as every day. Who the hell cares? Even absolute douchebags such as pf casini have their revival. What a bunch of nonvaleurs. But, I prefer italian gastronomy ahead of .........

Now presumably Draghi has had enough time to figure out what he is going to do when he is found with his pants around his ankles.

Round about now.

He will have at least a tiny plan to save some of his BFF when it all goes sudden-bananas. Germany won't sacrifice their banks to save the Euro, and he hasn't any power over the common folks. So what is his plan.

ha ha ha ha...it still makes me chuckle that markets got some confidence when draghi said he "will do whatever it takes"...i keep thinking of the the man rearranging deck chairs on the titanic...he would do whatever it takes to get those darned things all in a nice line before the ship struck the iceberg too.

and, lest we forget, we are still in the midst of a financial crisis. central banks, for all their faults, are acting as they have been empowered by their constitutions, namely AS LENDERS OF LAST RESORT.